The Elbert Files: 2014 will be a catch-up year

The good news for 2014 is that several previously negative economic drivers, including consumer confidence, global recovery, capital spending and government dysfunction, are now headed in the right direction.

The bad news is that the high expectations were built into last year’s stock market, making it highly unlikely that this year’s gains can match 2013’s 26.5 percent increase in the Dow Jones industrial average, 29.6 percent rise by the Standard & Poor’s 500 or Nasdaq’s 35.1 percent gain.

Like many people, I’ve been reading economic reports lately, trying to divine the future.

And like every year, I find myself relying heavily on the analysis of James Paulsen, the Iowa-born chief investment strategist at Wells Capital Management in Minneapolis.

Last year, Paulsen predicted that the S&P 500 might increase as much as 15 to 20 percent, breaking the all-time high of 1565 and “perhaps reaching as high as 1700 sometime in the new year.”

When he said that on Dec. 27, 2012, it seemed overly optimistic. But it turned out that the opposite was true, because the S&P 500, in fact, closed the year at a record high of 1848.

Paulsen’s projections for 2014: Unemployment will go down, factory utilization will go up, and there will be a modest increase in inflation and interest rates.

The stock market, he said, will be “volatile but essentially flat.” The S&P 500 could “reach as high as 2000 before succumbing to a correction” that would return it to about where it is now.

That volatility “may surprisingly make the commodity markets the best performing investment” of 2014, Paulsen said.

The economist listed several positive economic drivers.

“Both the U.S. and global economic recoveries are broader and more synchronized than at any time in this recovery,” Paulsen said.

His global optimism is reflected in a Jan. 16-17 Bloomberg poll conducted by West Des Moines-based pollster Ann Selzer. Her survey showed that for the first time in two years, a majority (57 percent) of investors, analysts and traders who are Bloomberg subscribers believe Europe’s bond markets have ceased deteriorating.

The situation in Europe is “hardly dynamism, but it’s a big improvement from blowing up,” Harvard University economist Kenneth Rogoff told Bloomberg News.

Meanwhile, a survey of economists by The Wall Street Journal’s MarketWatch said most believe the U.S. economy is on track for its best growth since 2005.

That makes sense, Paulsen said, noting that businesses held back by the uncertainty of government dysfunction, low consumer confidence and other factors now appear to be ready to grow.

Not only is consumer confidence at a five-year high, but factory utilization “should soon breach the 80 percent level which historically has led to improved capital spending,” Paulsen said.

Another positive is money supply velocity, which is the speed at which money is re-spent. Money velocity has begun to increase, Paulsen said, and that means our cold economy is finally beginning to warm up.

Economists in the MarketWatch survey predicted that growth of the nation’s real (inflation-adjusted) gross domestic product will hit 3 percent in 2014 for the first time in nine years.

Paulsen was even more optimistic, predicting real GDP growth of 3.5 percent in 2014. Private-sector growth was that high or higher at the end of 2013, he said, but it was masked by the sharp drop in federal spending that accompanied the government shutdown.

One final caution, he said: “Investors should avoid getting too cute in attempting to time the volatility this year, lest they miss what will likely prove only a pause in an ongoing bull market during the next several years.”

With an inflation rate of 4 percent or less, Paulsen said, “the economic recovery will most likely last several more years.”